Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Ignore Fitbit Inc: Here Are 2 Better Wearable Stocks

Apple and Garmin might be better plays on the booming wearables market.

Fitbit(NYSE:FIT) has lost over half of its market value since the beginning of the year thanks to ongoing concerns that its fitness trackers would be rendered obsolete by cheaper competitors and multi-purpose smartwatches. Fitbit soundly beat top- and bottom-line estimates last quarter, but its guidance for the current quarter missed expectations because of higher manufacturing costs and pricey media promotions.

Fitbit's Blaze. Image source: Fitbit.

Fitbit bulls will claim that new devices, like the Blaze and Alta, and new enterprise customers will get the company's growth back on track. They'll also note that the stock only trades at 10 times forward earnings with a 5-year PEG ratio of 0.6 -- low multiples for a company expected to post 21% annual earnings growth over the next five years. However, those multiples can spike quickly if analysts slash their estimates. Therefore, investors looking for less risky plays on the growing wearables market can consider two other stocks instead: Apple(NASDAQ:AAPL) and Garmin(NASDAQ:GRMN).

AppleBetween the third quarters of 2014 and 2015, Apple's share of the global wearables market rose from nothing to 18.6%, according to IDC. During that same period, Fitbit's fell from 32.8% to 22.2%, although shipments more than doubled. Apple's growth was fueled by a single device: the Apple Watch. A more recent report from Juniper Research claims that the Apple Watch accounted for 52% of all smartwatch sales last year.

Apple hasn't disclosed how much of its revenue comes from the Apple Watch, which is included in its "Other Products" category along with the Apple TV, iPod, Beats accessories, and other devices. Revenue from that unit rose 62% annually to $4.35 billion, or 6% of Apple's top line. Asymco analyst Horace Dediu recently estimated that Apple will sell 21 million Apple Watches within its first 12 months ending in April. Assuming that forecast is accurate and most customers purchase the low-end Apple Sport, the device might generate about $8 billion in sales in the first year -- more than four times Fitbit's 2015 revenue of $1.86 billion.

Apple Watch. Image source: Apple.

That's still a tiny slice of Apple's total revenues, but Creative Strategies analyst Ben Bajarin estimates that Apple Watch shipments could jump nearly five-fold to 100 million by 2017. If that happens, the Apple Watch could generate about a fifth of Apple's estimated 2017 sales and offset declines in iPhone and iPad sales, which together generated 77% of its sales last quarter.

Apple certainly isn't a "pure" wearables play like Fitbit, but that's why it's a more dependable stock. Although iPhone sales are expected to peak, and iPad sales have fallen for eight consecutive quarters, Apple can still pivot its business toward new products like Apple Watch, services like Apple Pay, or spend more cash on acquisitions, buybacks, or dividends -- all strategies Fitbit can't aggressively pursue.

GarminGarmin might seem like an odd choice since its wearables business was seemingly crushed by Fitbit and Apple last year. IDC claims that Garmin's global market share in wearables fell from 7% to 4.1% between the third quarters of 2014 and 2015, although overall shipments rose 72.5% annually. Nonetheless, Garmin has three notable strengths: a move diversified portfolio, a dividend, and a slightly cheaper valuation.

Garmin's Vivo devices. Image source: Garmin.

Whereas Fitbit's main product line is split into more fashionable fitness trackers like the Alta and more functional ones like the Flex, Garmin sells a wide range of GPS-enabled devices for the auto, outdoor, aviation, marine, and fitness markets. Garmin's softest spot is its auto business, which has lost significant market share to smartphone-based navigation apps. Last quarter, auto systems revenue declined 21% annually to $268.5 million, or 34% of its sales.

However, all four other businesses posted positive growth, with the fitness and aviation businesses posting double-digit gains. That growth offset most of the auto segment's losses and resulted in a mild 2.8% annual decline in quarterly sales to $781 million, which beat expectations by nearly $21 million. To further diversify its business, Garmin recently agreed to acquire DeLorme, a maker of satellite-tracking devices with two-way text messaging.

Garmin expects flat revenue growth for 2016, which still beats the consensus estimate for a 1% decline. Earnings per share, which include a $0.05 hit from the DeLorne acquisition, are expected to fall 10% to $2.25 -- missing the consensus estimate by $0.05. Despite that bottom-line weakness, Garmin still pays a forward dividend yield of 5.1%, and spent 52% of its FCF over the past 12 months on dividends and 32% on buybacks. Fitbit spends its cash on neither, and its P/E of 19 remains slightly pricier than Garmin's P/E of 17.

The bottom lineIDC estimates that total wearable shipments will rise from 111.1 million units this year to 214.6 million by 2018. Fitbit might look like a promising way to invest in this market, but its top-heavy model and lack of a defensive moat make it a risky bet. Therefore, investors looking for less risky wearable plays should check out Apple and Garmin's more diversified and more shareholder-friendly business models instead.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!